FOREX-Yen slips, focus on government and BOJ response

Published August 1, 2011

Reuters

By Masayuki Kitano

TOKYO, Aug 13 (Reuters) - The dollar fought its way higher
on the yen on Friday following a report Japan's prime minister
and the head of its central bank would meet to discuss ways to
deal with the Japanese currency's export-sapping strength.

The greenback clawed its way to 86.08 yen, up 0.2 percent
from late U.S. trading on Thursday, though traders reported
tough resistance ahead of stops at 86.30/50.

The latest lurch higher came after the Asahi Shimbun
reported Japanese Prime Minister Naoto Kan and Bank of Japan
Governor Masaaki Shirakawa may meet as early as next week to
discuss the yen's strength and possible responses.

A government source later confirmed that the government and
the BOJ are coordinating to set up such a meeting.

Speculation has been intense that authorities would finally
act on the yen given its strength was hitting stocks and
exports. The BOJ confirmed it had checked forex rates on
Thursday but emphasised it had no levels in mind.

In the wake of the yen's rise to a 15-year high against the
dollar of 84.72 yen earlier this week on trading platform EBS,
market players say the chances of yen-selling intervention at
some point cannot be ruled out.

The focus now is on what kind of specific measures the
government or the BOJ may come up with to curb yen strength.

Judging from what happened in late November to early
December, there is a chance that any extra monetary easing steps
that the Bank of Japan may be mulling could be unveiled before
the possible meeting between Kan and Shirakawa, said Masafumi
Yamamoto, chief FX strategist Japan for Barclays Capital.

"I think there will be a lot of disappointment if any
monetary easing steps by the Bank of Japan are viewed as being
ineffective," Yamamoto said.

"In that case, authorities may be forced to conduct actual
currency intervention," he added.

BOJ OPTIONS

Possible options for the BOJ may include steps such as
trying to expand the amount of banks' current account balances
parked at the BOJ, expanding the amount of its fixed-rate fund
supply operation or extending the maturity, Yamamoto said.

The BOJ held an emergency meeting on Dec. 1 and unveiled a
fixed rate fund supply operation, after the dollar fell below 85
yen in late November. That measure came ahead of a meeting
between then-PM Yukio Hatoyama and Shirakawa.

Market players say Japanese authorities seem unlikely to
intervene unless the dollar drops below 85.00 yen and gets
closer to its record low of 79.75 yen hit in 1995, or the
greenback's drop against the yen becomes more volatile.

Analysts say Japanese authorities do not seem eager to
intervene.

"The Japanese authorities have no appetite for FX
intervention," JPMorgan analysts said.

"Not only do they doubt the efficacy of intervention, but
yen-selling would be difficult to justify, given strong G7
rhetoric against currency manipulation," they wrote in a note to
clients. "It is politically unpopular given the magnitude of the
losses on Japan's FX reserve."

The euro edged up 0.2 percent to $1.2855, with support lower
down at its 100-day moving average at $1.2803.

Traders felt it could hold in a $1.2762/1.2897 area for now
with the risk of a short-squeeze into euro zone growth data due
later.

Data from the U.S. includes retail sales, consumer
confidence and the consumer price index, and markets fear
disappointment.

Matthew Strauss, senior fixed income and currency strategist
at RBC Capital Markets, cautioned that the CPI report could be
more market-moving this time.

"With deflation talks dominating economic discussions and
comparisons with Japan's lost decade now a common pastime, CPI
data pose a major risk to USD tonight, maybe even more so than
retail sales," he said. "It is difficult to see how a soft
reading would not negatively impact the dollar."

The dollar index, a gauge of the greenback's performance
against six major currencies, was down 0.2 percent at 82.481,
after rising 0.4 percent on Thursday.

On the week, it has risen 2.6 percent as worries about the
global economy prompt investors to cut positions in risky assets
and cover short dollar positions.

The index has resistance at 83.451, its July 21 high, while
support is seen around the previous day's low of 82.109, and
81.96.
(Additional reporting by Wayne Cole and Reuters FX analyst
Krisha Kumar in Sydney; Editing by Joseph Radford and Chris
Gallagher)